Over time, Warren Buffett has shown a keen ability to produce value for his shareholders. Anyone can pick a good stock in a bull market, but having the same capacity for consistency through bear markets is a skill few have. Long-term investors should follow any statement Buffett makes. When his annual letter to Berkshire Hathaway shareholders comes out, many in the investment community will take a moment to dissect every word and figure out his ongoing moves.
2022 was no different; in the 10-page letter, Buffett provided further insight into his perspective on his company and the current investment landscape we all play. There was one statement that stands out to help us understand his method of thinking and strategy:
"Charlie [Munger] and I are not stock pickers; we are business pickers,"
If we took a similar approach, our portfolio returns and peace of mind would significantly improve.
Buffett thinks long-term but sees few opportunities now.
Buffett looks for a deal and thinks long-term. He is not looking for short-term gain. He famously said back in the 1990s
"If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so will the portfolio's market value."
This strategy has not changed for over 50 years; he has generally bought companies that he believes are undervalued and then held them. There is a simple metric to see that he thinks the current market is overvalued. Berkshire has about $144 billion cash on hand, its most cash ever. He has stated there is currently nothing good to buy:
"We find little (in the stock market) that excites us."
And over the past six years, Berkshire has made no major acquisitions. Berkshire has, however, believed in itself, and Buffett reiterated this belief, writing:
"Today, internal opportunities deliver far better returns than acquisitions,"
Therefore, they repurchased over $51 billion worth of Berkshire's stock in 2020 and 2021. This repurchase seems to have been an excellent choice, with Berkshire's operating profits rising 25% to its record $27.46 billion. Surprisingly, 1/3rd of this profit was supplied by Berkshire Hathaway Energy and BNSF Railroad, whose 4th quarter operating profits swelled 45% despite the supply chain issues blamed on Covid-19. Buffett is willing to wait for a correction and finds a company with the potential for long-term success; until then, he is happy with stock buybacks and the profits from current Berkshire investments.
Investments are paying off.
Buying good companies has consistently paid off. For 2021, Berkshire's full year's net income better than doubled to a record $89.8 billion, which was on the backs of its direct investments' returns.
Apple (Berkshire's largest holding was making up 47.60% of the portfolio), Bank of America (13.58%), American Express(7.49%), Coca-Cola (7.16%) and its other smaller holdings in its vast portfolio. 2021 meant that Berkshire Hathaway even passed META (formerly Facebook) in value.
So how can we benefit if there is nothing to buy?
Besides buying Berkshire stock itself, which is currently running $489,000/share (fractional shares are possible on some platforms), we could purchase some of the companies that Berkshire is invested in. The other strategy is to take a step back and focus on the underlying business.
Buffett's words, actions, and success are pretty timely when we see the current evolution of investment. In the mid-1950s, the hold time for stocks was at eight years, and it is down to only 5.5 months. If we are to add in computer trading, the average is 22 seconds. There is a magic pill mentality where individual and institutional investors are increasingly searching for short-term profits with their picks.
What is the cause behind this? The two primary reasons are; zero-commission trading, which makes it extremely easy for anyone to get in, make a small profit (or significant loss), and get out quickly without a care for the actual company behind the purchase, in a gamified way. The main problem with gamification is that inexperienced traders are trading too frequently, and their resulting returns are poor.
Second, blame for short hold times is placed on the financial media industry and the surrounding systems. Traders can set up mobile alerts for every one of their portfolio's holdings to be monitored on a 24-hour basis. While this can be good for preventing severe losses, if set too conservatively, it can trigger trades that don't need to happen, buying and selling stocks based on the tiniest bit of information that may even be immaterial.
Think like Buffett in 2022 and beyond. Having a short-term mindset doesn't allow investors to benefit from the growth of a company's revenues and profits over time. Buffett believes these fundamental metrics should be an investor's focus. Buffett has proven that long-term success is possible when looking at the fundamentals of a company and investing in the long term, taking time to find the good buy rather than trying to get a short-term gain.
The information in this article is well-researched and factual. Still, it contains opinions also, and IT IS NOT FINANCIAL ADVICE and should not be interpreted as such, do not make any financial decisions based on the information in this article; we are not financial advisors. We are journalists. You should always consult with a professional before making any investment decisions.